What Is Insurance Premium Funding?

What Is Insurance Premium Funding?

Insurance premium funding can help smooth cash flow for today’s business owners. Juggling bills and paying often hefty insurance premiums can leave business owners cash strapped. Where do you find the money to pay an entire year’s business insurance premium?

Premium Financing Can Help Smooth Cash Flow

Premium financing provides the funds required to cover your insurance premium. Third-party finance companies specialise in insurance premium cash-flow solutions for Australian business owners. The premium finance company pays the insurance company in full, and you pay the finance company monthly payments. With premium financing, no matter what the policy costs, you can manage your payments more effectively.

Premium financing offers business owners several important benefits:

  • You can manage your cash flow more effectively.
  • You can spread your insurance costs over a longer period.
  • You can smooth your business cash flow, especially important if your business has seasonal highs and lows.
  • You can take a tax deduction on interest paid for your business policies.

To finalise premium financing agreements, the finance company will request you sign a premium financing agreement. It’s a simple process facilitated by your insurance broker. When interest rates are low or if you are expanding your business, premium financing may be the business decision that allows you to direct your cash towards moneymaking endeavours.

Whether you repay the entire premium amount over ten months or twelve, premium financing can be a business owner’s money-management partner.

How Do Premium Finance Companies Calculate Premium Payments?

Premium financing methods can vary from company to company. However, here is a basic example of how premium financing works.

Annual insurance premium $1,000

Funding contract term, 12 months

Funding contract setup fee, typically $30

Funding contract interest rate, typically around 10%

Total interest charge ($1,000 x 10%) = $100

Total amount payable (Premium $1,000 + Fee $30 + Interest $100) = $1,130

Monthly payment (Total amount payable / 12 months) = $94.17

Premium finance companies generally charge “simple interest.” This means your interest does not compound, making your repayment amounts straightforward and less costly.

For today’s small business owners, paying $94 per month rather than coughing up $1,000 can be very attractive. And of course, the interest you pay on the business loan is tax deductible.

Important Things to Consider Before Choosing Premium Financing

Here are a few things to think about when considering premium financing.

  • Using other people’s money costs you more. Even if the cost is low, you should still consider that additional cost when making your final decision.
  • If you cancel your policy, it may take about a month for the finance company to stop your monthly payment.
  • If you cancel your policy, the finance company receives any refund from your insurance company. The finance company workers then calculate if the company owes you a refund.
  • Any premium finance is a legal contract. When you sign it, you are entering into a formal contract. Even if you don’t sign the contract, the financing company can enforce the terms of the agreement if you stop making payments.

Should I Use Premium Financing?

Premium financing can be a great choice if you’re looking to spread your insurance costs over a year rather than initially making a lump payment. After considering interest rates and the growth phase of your business, you may find that premium financing offers you a way to better invest your money in growing your business. Or it may help smooth some of the sticker shock of your annual premium.

Today’s business owners face many stressors. Cash flow is one major worry. If you often have highs and lows in cash flow as many business owners do, premium financing prepays your annual premium in full. As long as you pay your monthly financed premiums, you’ll have peace of mind that your policy is in force.

Important: Premium funding may be available subject only to meeting the premium funders qualification  criteria. Rates and terms and conditions are examples only , will vary significantly from funder to funder , may or may not be available or may have limitations or exclusions. Some of the benefits may not be relevant to your business and you may better suited paying your insurance premium upfront . DO NOT rely upon the above. Check your premium funding  schedule carefully for insurance rates ,  inclusions and exclusions and limitations. Talk to a SMART business insurance broker on 1300 542 573 for more information.

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